Pharmaceuticals account for approximately 40 percent of total health
expenditure in China, a disproportionately high amount compared to most other countries. Pharmaceuticals are used - and overused - in ways that are neither financially
nor medically efficient. With a rapidly aging population, they are likely to be a continuing
driver of high costs. Thus, the Government of China has assigned high priority to
pharmaceutical reform, including a forward-looking National Essential Medicines System (NEMS) announced
as part of the major reform plan announced in 2009.

Essential medicines policies have been in place in China for nearly 20 years,
yet their use has not gained much traction. Reinvigoration of the concept within the context
of the national health reform plan represents a major step forward; however, structural impediments - which largely explain the lack of strong success in the past -
remain in place and will need to be addressed for success in the future.

Section 2 of this paper discusses several structural impediments that will need
to be overcome. Of these, the main problem is the provider payment system through
which both institutions and individuals receive payments for health services and
pharmaceuticals, including a supply chain in which distributers pay - bonuses and - rebates to
prescribers who in effect serve as sales agents for manufacturers. Both health facilities
and physician incomes have become reliant on the supplemental income that is received through
this process. As a result, providers have a direct incentive to prescribe more
expensive drugs and more drugs than are needed. These financial incentives exacerbate and are
exacerbated by the widely held popular perception that essential medicines (which are almost
entirely generic drugs) are not - as good as brand drugs. The widespread perception of
low quality is complicated by well-publicized failures in quality assurance, as well as the
significant role played by pharmaceutical representatives at the service-delivery level in
communicating the use and value of new drugs. These perceptions are further complicated by the
lack of independent scientific assessment of drugs and medical technologies, and by
inconsistencies and methodological difficulties in drug pricing...